THE TOP 4 OIL STOCKS FOR 2018

Transcription

1 OGIB INTERIM BULLETIN # March 12, 2018 THE TOP 4 OIL STOCKS FOR 2018 Folks, here's what I'm working on right now: 1. Get you FOUR oily stocks to follow to give you some focus in the OGIB portfolio. This list is for offence; these companies should outperform the others on a percentage basis this year, assuming oil and gas prices stay roughly where they are now (and I think there's a good chance that happens). While the best companies do not always the make the best stocks, these 4 mostly have great fundamentals in that they are high growth, low cost producers, and 3 of the 4 have lots of Free Cash Flow, not just EBITDA; Ring Energy is the exception here). You will note they also have tight share structures, which I like to see as well. THE NEXT SET OF S will focus on something very different. I will be giving you a portfolio of potential OGIB stocks...these are stocks I do not yet own, but I am following because they have an upcoming catalyst that could transform the company and its valuation (read: the stock price should jump BIG if management executes). You should get two ideas before I get away for a two week March break with my family. Then there will be another two ideas in early April. These are all mostly downstream power-related companies, with either a novel technology or a business model that is just starting to catch traction. CUI Global is a perfect example of what I'm talking about, though of course I already own that one. It's still all energy, just a broader, more diverse universe. These new investment ideas will come with the same style of research reports you have come to expect from me. I would suggest to you that it's NOT a good idea for you to rush out and buy these stocks as soon as you see them in your inbox, as they almost all have One Big Wart that has to be fixed before they are invest-able. But here and now I'll give you the 4 stocks I think you can focus in on for leverage in I give some colour on my thinking here, but please remember there are full reports and updates available in the Members Centre: TOP 4 OIL STOCKS FOR LEVERAGE RIGHT NOW:

2 GeoPark Yangarra Ring Energy Viper Energy GPRK-NYSE YGR-TSX REI-NYSE VNOM-NASD You re probably more surprised to NOT find Spartan and Parex there, and I ll explain those in a minute. The common thread here is greater than average growth at lower than average cost for that growth. Of the companies listed above, I see Geopark and Yangarra as having the lowest valuation compared to their growth. YANGARRA I ll start with Yangarra, as it should near double production in the next 12 months, going from the current 8000 boepd (which is up 20% QoQ, not YoY) to 15,000 boepd sometime in Q1 19, CEO Jim Evaskevitch told me in an interview this week. Yangarra is blessed with a simple story it s a one play company; in fact it s a one zone company the bioturbated (or Lower) Cardium. It s in an area with great infrastructure south central Alberta. And there is now enough history in the play for the Market to have confidence that results to date should be replicated throughout. Up until now, YGR has been getting 8-10 month payouts while exploring; drilling on a grid around their play. This means that big well pads have to be amortized on 1-2 wells. This year they will try spacing down to 100 meters, which would allow for 16 wells per section (1 section = 1 sq mile) and greatly increase their well inventory, already at 662. And they re still buying more land on a regular basis. So there is a really good chance well costs and therefore economics and cash flow make a big improvement in H2 18. And they re doing all this on only 58% liquids. I asked Jim how he gets such good economics in this Lower Cardium zone. He said they don t electrify their well pads, but rather use the natural gas produced to fuel the site. And they re up to 80 well stages per mile, which he said he really didn t think would ever work as well as it has. "Our first (well) pad cost $1.3 million, and the second one was $975,000. That s a big difference. And now that have a sense of the discreet issues we may have on that pad, costs will go down. We ll be able to go back and save a ton of money (on subsequent wells on each of these new pads). These wells will be real cheap. We will make a lot more money.

3 "Here s an illustrative example," he continued. "If you take the average production for 2017 which was 5740 bopd and our decline is 30%--but even at 40%, we have to replace 2300 bopd and at $12,000 per barrel efficiency (the cost per flowing boe to get out of the ground KS), we only have to spend $27.5 million to keep production flat. "On $30 netbacks (profit per barrel) as we had in Q4 17, that equals $62.8 million cash flow or $35 million Free Cash Flow. That s only eight wells a year. "Now, if we touch 15,000 boepd in Q1 2019, then we have to replace 6000 bopd. Times that by $12,000, it takes $72 million to keep production flat on $164 million cash flow or $92 million Free Cash Flow, though I guess you would subtract $10 million for land and other stuff." Be aware the Street has Q production at 12,500 and YE 19 around 13,800 boepd not what Evaskevitch has internally. Operating netback in Q4 was $27.68/boe. Yangarra has 86 million fully diluted shares out, and $93 million in debt. They ve gone from 2.4x D:CF last year to 1.2x this year and likely down to.5-.6x for The stock is trading at just x 2019 projected cash flow; this multiple should double or more as they grow into their projections. There s a few things that could even see the company truly garner a premium multiple: 1. better economics (with pad development), 2. and having the Downspacing at 100 meters work (As a side note here, this sounds VERY similar to Tamarack Valley, TVE- TSX, though there CEO Bryan Schmidt has grown via a lot of M&A (and has 228 M shares out) while Yangarra is completely organic growth (with 83 M shares out). GEOPARK The reason GPRK gets the nod ahead of Parex here is share count 60 million vs 155 million. A lower share count gives them more leverage, and the fact they have more debt makes them more levered. And they have a lower valuation. In 2017, GPRK generated $167 million in cash flow from operations, while spending $106 million, resulting in Free Cash Flow of $62M. They grew oil production 30%. In 2018, they re going to have $230 million in cash flow and $110 million in more FREE CASH FLOW while growing (only) 25%--and trading at 3.8x cash flow. Wells pay out in just a few months for them in Colombia, their Big Growth

4 Engine, and F&D cost (Finding and Development) are UNDER $2/b for Colombia. Huge cash flow, low valuation. Big catalyst would be a discovery at one of the two plays around LLA-34, (Tiple, with CEPSA (out of Spain), and Zamura with Parex) their Big Growth Engine right now. Like Yangarra, they ve taken their D:CF from the mid-2s to the low 1s and by the end of 2020 they could be debt free organically. I still like Parex A LOT, please don t get me wrong. It s just that this article is about leverage. RING ENERGY I often refer to Ring as the oiliest producer in the USA because it is. It s because they re after a very shallow oil formation and the deeper hydrocarbons go, the more heat and pressure on them and they cook, and slowly turn into natural gas. Shallow not only means oilier, it (obviously) means cheaper so it s a great double whammy of value for investors. The Market is expecting a BIG jump in production and cash flow this year from $47 million to $100 million, and to a large degree has priced that in at 8x 2018 cash flow. Ring just raised $71 million to pay off its small amount of debt and generate dry powder to cover cash flow outspend ($50 million), to bring in a third rig, to add acreage. They expect to be cash flow positive by late 2018, and that s about the only guidance this team gives the Street (which generally ends up meaning the Street gets too bullish for its own good with this team). So for this stock to go to $25 by year end like I hope it will, they must: 1. convince the Street their growth into 2020 will continue as it is now. I said 2018 EBITDA is doubling to $100 million; 2019 EBITDA consensus is about $185 million. For this stock to get to $25/share by year end or early Q1 2109, 2020 EBITDA would need to be estimated to be close to $325 million with the idea that this stock generally trades 5x next year s cash flow, and 8x this year s cash flow. So that s probably aggressive. Even for the stock to go up 50% from here to $21 and that s what I look for; I want to find trades where I can get 50% upside in a year EBITDA would have to $280 million, and I think that is achievable for this team. 2. continue getting strong well results. Q4 17 well results had an average IP30 of 458 boepd, vs the 2017 average of 584 boepd.

5 3. Not hedging away any more upside. Those are still great wells for $2.2-$2.4 million cost; they would still pay out quickly and be well above 75% IRRs but the Market has to hope this drop in IP30s doesn t become a trend of lower wells. VIPER ENERGY Viper is a royalty company it receives revenue, and has no costs. It is not an operator; rather it has the best operators in the USA producing for it. Think of Viper as the Permian Landlord. It is a variable rate MLP focused on the Permian, but now with some Eagle Ford exposure. Variable rate means it pays out a certain portion of cash flow, depending on commodity prices and production. As the Permian has fully half the drill rigs in the US operating there now and the rig count is still growing production growth is all but assured for a couple more years at least. Commodity prices I have no idea. It is majority owned by Diamondback (FANG-NYSE) which is usually the most highly valued oil producer in the USA; i.e. it has the highest multiple. The company has no operating costs, but it does have debt and it does trade at 9x EBITDA so like Ring Energy, the stock is never cheap. And there are risks here Permian discounts increasing, and FANG itself has now started a dividend for some reason. And to me The Big Risk is that they do another big financing and dilute the stock to pay down debt. The recent move into the Eagle Ford where some wells are getting boepd is positive. The last quarterly distribution was goosed by a one time event, so the next couple quarters may not experience the same growth as it has the last three quarters, and that s why I ve put it at the end of this article. WHAT ABOUT SPARTAN AND CANACOL As I said two weeks ago after Spartan released its YE 17 results it remains a best in breed producer with well over $60 million in Free Cash Flow last year, and that should increase dramatically in 2018 with oil over $60. D:CF is under 1.0 great company. I think I even timed my Spartan purchase quite well last fall but the institutional crowd who move markets are not buying Canadian oil stocks. If and when they do, Spartan could quickly vault to the top of this list, but right now sigh.

6 As I ve said many times as well, the best companies don t always make for the best stock charts Geopark and Ring Energy were essentially flat through Canacol could be close to the top of this list towards the end of The issue here is that there is not what I would call market-moving news until the next bit step up in production in Q1 19. I would like to think the Market will reward the stock a bit as pipeline developments get announced, but that hasn t been the history with this stock; it usually gets rewarded afterwards. MidCon Energy Partners also has a lot of potential leverage. They have the support of billionaire investor John Goff, who will put his brainpower to work in helping management deliver. Goff is not a distressed investor in the sense of squeezing the money out of dying companies, but rather he will encourage management to spend money on high IRR projects. This team will not sit around looking for leverage with the oil price over time; they will be proactive and we will just have to wait for a couple quarters to see how it all plays out. I bought this stock right--when the rest of the Market thought this stock had serious bankruptcy risk. I think management is sand-bagging the Market on very low projected 2018 production and cash flow. Strong potential to be A Big Outperformer this year, but likely not happening until H2 18.